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Analysis of Profitability Ratios

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Analysis of Profitability Ratios

If a company shows good http://essay-writing-help332.mystrikingly.com profitability then the shareholders can expect good profit distribution on their investment. For this purpose we should also examine the dividend payment history of the company in order to make a reliable estimate of profit distribution.
So far as the Spectrum Manufacturing Company [SMC] is concerned, its profitability is decreasing. The reasons of the decrease in profitability are:

Decrease in sales
Increase in interest expenses
Increase in the amount of depreciation [may not be a concern, since it is non cash expense. Further increase the depreciation will ultimately decrease tax liability]

The disadvantages of using above ratios are that these ratios may not provide an accurate estimate of the company profitability if used individually. The ratios calculated above should be used with other techniques in order to get more accurate and reliable estimate of the company financial position. The above ratios also ignore the impact of items which may result in low profitability but may increase share holders wealth maximization.